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U.S. market pounded on Greek default fears

Kim Hjelmgaard
USA TODAY
People wait in line outside a National Bank of Greece branch, in Athens on June 29, 2015.

The U.S. stock market suffered its worst drop in two years Monday amid a global selloff after Greece closed its banks and imposed restrictions on cash withdrawals to try to prevent a deepening financial crisis from worsening amid faltering bailout talks with its international creditors.

President Obama revealed late Monday afternoon he has spoken with French leader Francois Hollande over the crisis.

"The two leaders agreed on the importance of restarting work to reach agreement on a package of reforms and financing that will allow Greece to return to growth and debt sustainability within the Eurozone," according to a White House statement.

About two hours before the presidential statement, the Dow Jones industrial average closed down 350 points, or 2.0%, to 17,597 for its biggest slide since June 2013. Indexes in Europe were hit even harder with Germany's DAX index down 3.6% and France's CAC 40 down 3.7%. In Asia, Tokyo's Nikkei 225 fell 2.9% and China's Shanghai composite lost another 3.3% to officially enter bear market territory — meaning a drop of 20% or more.

The global slide came after Greece's government ordered the country's banks and stock market closed for a week to try to contain collapsing share prices.

Yields on Greece's 10-year government bonds moved past 14%, although the euro was up a little against the dollar at $1.12.

Standard & Poor's rating agency cut Greece's credit rating further into junk status Monday and said there is now a 50% chance of Greece leaving the eurozone.

Over the weekend, Greek Prime Minister Alexis Tsipras said his country would hold a July 5 national referendum on whether to accept austerity measures demanded by the International Monetary Fund, European Central Bank and European Commission in return for releasing the final $8 billion of a $270 billion financial crisis aid package.

However before that, on Tuesday, Athens needs to pay the IMF a $1.8 billion loan repayment or face the prospect of default, a scenario that could increase the possibility of Greece leaving the eurozone, a 19-member economic and currency bloc.

"With negotiations halted, the Greek situation has rapidly moved to the worst-case scenario and investors who jumped to the conclusion last week that a deal was done will be suffering significant losses," said Alastair George, chief strategist at Edison Investment Research, a consultant.

Sunday, the ECB froze emergency funding to Greece's banks that lenders there have been using to meet short-term funding needs.

The capital controls put in place Monday by Greece permit people to withdraw just $66 per day at ATMs, a limit that affects residents but not tourists.

About 20% of Greece's GDP is generated through tourism.

Banks have been ordered to stay closed for six days, starting Monday.

Eurozone officials and leaders, including French President Francois Hollande, said Monday that there is still enough time for Greece to reach an agreement with its creditors before a June 30 deadline.

And Jean-Claude Juncker, the president of the European Commission, said in a news conference that negotiators did not deserve the criticism they were receiving from some quarters for so far failing to reach a deal.

"We moved mountains until the very last minute when the Greek authorities closed the door," he said.

Juncker said he felt "betrayed" by Greece's negotiators and that their proposals were either "delayed" or "deliberately altered" at the last minute.

Juncker added that he expected the eurozone to continue to be comprised of 19 members.

Tsipras has accused Greece's creditors of using "blackmail and injustice" in efforts to broker a deal.

It remained unclear whether Athens would make the loan repayment due Tuesday. Reuters, citing an unnamed Greek official, reported that Greece would not make the payment.

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